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KNOWLEDGE LIBRARY

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27Jun

Warehouse Occupancy Percentage

Optimal storage utilization helps enforce healthy inventory management. In our early work with Honda their...

02Jun

Efficient Procurement Inventory

Efficient procurement inventory (EPI) is often required to realize steep discounts when a special opportunity...

02Jun

Inventory Carrying Rate

The inventory carrying rate (ICR) is the percent of the unit inventory value used to...

26Jun

Inventory Activity Profiling & Data Mining

Suppose you were sick and went to the doctor for a diagnosis and prescription.  When...

27Jun

Inventory Performance Measures

Inventory performance measures include financial, productivity , quality, and response time indicators for evaluating the efficiency and...

Lost Sales Cost

Lost sales cost (LSC) is the cost of the sales lost when we are not able to satisfy customer demand.  The lost sales cost for an item is computed by multiplying its annual sales potential (i.e. sales that would have occurred if all demand was satisfied = AD x USP) by the portion of sales that we were not able to satisfy (1 – UFR) by the shortage factor (SF).

LSC = [AD x USP] x (1 – UFR) x SF

For example, if an item has an annual demand of 2,000 units per year; a unit selling price of $2,400 per unit; a unit fill rate of 90%; and a shortage factor of 40% then the lost sales cost is

LSC = [2,000 x $2,400] x (1 – .9) x (.4) = [$4,800,000] x .1 x .4 = $192,000 per year

In the figure the expected lost sales costs associated with a medium moving SKU were plotted vs. target unit fill rates and inventory investments required to achieve them. Note that expected lost sales cost declines from $245,568 per year at a target unit fill rate of 50% to $147 per year at a target unit fill rate of 99.95%.

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